I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals.
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Joint returns for the last year of a marriage seem to generate a disproportionate amount of aggravation. The latest story is that of Jason Alan Bruce, who recently represented himself in Tax Court. He was facing a deficiency of $6,804 for 2010 and an accuracy penalty of $1,361. It did not go well for Mr. Bruce, but it could have been worse.

Mr. Bruce filed a joint return for the 2010 year electronically in January 2011, claiming dependency exemption deductions, the child tax credit, the additional child tax credit and the earned income credit. After hitting the send button, he mentioned to Ms. Bruce, from whom he was separated, that he had taken care of their joint return.

Ms. Bruce did not object but indicated that she wanted a friend of her mother’s who “does taxes” to look at the return with a view to possibly finding some additional deductions related to education expenses. Communications appear to have broken down there. Ms. Bruce filed in March 2011 claiming the same two children that Mr. Bruce had claimed.

Unscrambling An Egg

It is possible for a joint return to be valid is situations where one spouse never sees the return, but implicitly consents to it. That is why I recommend that a spouse who does not want to be included in a joint return should file separately even if he or she has adjusted gross income below the filing threshold. A joint return is an irrevocable election – once the due date has passed. Ms. Bruce filed her return in March, though, at least a couple of weeks before the due date. So even if she had tacitly consented to the January filing, she changed her mind in time. So Mr. Bruce is stuck with married filing separate as his filing status.

When it comes to the kids, things really get complicated. Solomon is not sitting on the Tax Court so kids don’t get split there. Each kid can only be claimed by one person. If things had been a bit better coordinated, maybe they each would have claimed one, but given that they each claimed both and both kids were living in the same circumstances, the Tax Court had to give both of them to one parent or the other.

Under section 152(c)(4)(B), as relevant here, if an individual may be claimed as a qualifying child by one or both parents and they do not file a joint return, the child is treated as the qualifying child of the parent with whom the child resided for the longer period during the taxable year. Sec. 152(c)(4)(B)(i). If the child resided with both parents for the same amount of time, the child is treated as the qualifying child of the parent with the higher AGI.

If everything is equal, the kids will go to the parent with the higher adjusted gross income, but Mr. Bruce had moved out of the house where he was living with Ms. Bruce and kids in December, which gave her slightly more time with them than he had. That trumps his higher AGI.

On The Bright Side

I really think the IRS could be a little more liberal in letting the accuracy penalty pass. The Tax Court usually backs them up on it, but I think they may be moving a little bit. I’m not sure it is a trend, but I’m happy to say that the Court ruled in favor of the taxpayer on the penalty issue.

The record reflects that although petitioner filed a 2010 joint return without the express consent of his wife, he typically took care of the tax return preparation during the marriage. The record reflects that Ms. Bruce presumed petitioner would file their return and did not otherwise object when she learned that he had in fact filed a return. Ms. Bruce later provided her bank account information to petitioner after he had mentioned apportioning the refund they were due. Further, petitioner credibly testified that he believed Ms. Bruce did not have her own income in 2010 and that it was reasonable for him to believe that a joint filing would be beneficial to the couple. Although petitioner’s initial joint return was adjusted by the IRS as a result of the later separate return timely filed by Ms. Bruce, petitioner has demonstrated that he acted in good faith at the time the return was filed and has also shown that he had reasonable cause for filing the return as married filing jointly.

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It seems that this is another one of those cases you often reference where it is not about the money.

If it had been about the money, the petition and his ex-wife would have easily resolved their tax matters in the most economically beneficial way which, it seems to me, would have been the joint return route.

Nothing is apparent to me from a once-through reading of the case just what they had against each other, but it does appear there must have been some level of personal animosity involved in the prosecution of the case.

I also got to wondering, since it mentions the petition living in military housing for the prior year, whether he was drawing income tax free military housing in 2010 while living with his mother-in-law.